What Investors Need to Know About Confluent Stock

Tech stock Confluent (CFLT -1.90%) hasn't even been a publicly-traded company for six months, but the company has already caught investors' attention. The stock currently has a market cap of $19 billion and is growing at a rapid pace. In this segment of "Backstage Pass" on Motley Fool Live, recorded on Nov. 15, Fool contributors Jason Hall and Danny Vena discuss what potential investors need to know about this stock before taking the plunge. 

Jason Hall: The company is called Confluent. I think it's Nasdaq, not New York Stock Exchange, so I need to fix that, but I'm not at all going to take credit for finding this company. Yasser El-Shimy found this company and brought it to The Fool.

I was lucky enough to read the research report that he wrote. It is a really neat company. The way to think about it is it's becoming the plumbing for data, for how companies deal with data. If you think about data and businesses and how they handle it, you have all of these different things. In a company, you have apps or applications, or software tools within a department where data comes in.

Maybe it's customer acquisition, maybe it's sales pricing, maybe it's marketing results, maybe it's inventory, all of these different pieces of data. One department might have multiple applications if they're sending the data to databases. You've got different files for these different databases. The company's got half a dozen departments before you know it, you've got 10, 15, 20 different software applications, all generating data. That's all in different file formats. It's going to live in a database, and then you have a data warehouse.

Maybe it's in the cloud, maybe it's on proximity. The company has their own internal infrastructure where they're storing this data. Anyway, data goes to this place. The way analytics is done today, the way data analysis is handled is, historically, the data all goes to this place. After the fact, the experts do whatever they do their magic and do their analysis and figure out how to leverage that data in some way.

They use that data typically after the fact. Confluent, their whole motto is data in motion, and the idea is real-time data streaming. Instead of dealing this data as the static files, it's treating it like a text message coming in.

It's treating it like a data stream so that companies can take that data in real time, and from the very moment that data is acquired, start leveraging it, start using it in some way, so real-time data is so powerful. The other thing is that, with their tools, ubiquity of the file type and the source, that's really powerful.

So instead of having to peel apart all these layers of data after the fact in all these different formats, dealing with it all as soon as it comes in is vastly more powerful in terms of being able to act on it immediately or decide what to do with it immediately.

Now Confluent is a really neat company. It was actually founded by the creators of the platform that they're built on. It's built on Apache Kafka, which is the largest open-source data streaming technology. Its three founders came from LinkedIn.

They were heavily involved in IP and data infrastructure. They've built Apache Kafka, this open-source tool, to deal with a problem at LinkedIn that there were no products on the market available to address. They built this great tool, they made it open-source, put it out there for developers to be able to use and improve, and then had a realization.

Hall: This is incredible. We have a business. They left LinkedIn, and they started Confluent. So Confluent, started by the creators of Kafka which, again, is the largest open-source data streaming technology, and they are the real experts in this open-source tool. How big is the market?

Last year, it was a $50 billion market. It's expected to reach $92 billion by 2024 and continue growing. Confluent is still a small company, trailing 12-month revenue through the third quarter which ended in September, $338 million that was up 58%. Confluent Cloud, so it's the cloud version of this tool, revenue from that was up 175%.

Again, its software is a service. A high-margin product, 69.4% gross margins last quarter, and they're generally trending higher. Here is the thing. This is the largest open-source tool. That in and of itself means that there's built-in competition. There are plenty of companies that are building their own tools on Kafka to do this.

They are not looking for somebody else to help manage it. There's immediately internally developed competition, and then it's a very competitive market. Microsoft (MSFT -1.27%), you guys have heard of Microsoft. Azure has a data streaming tool. Amazon (AMZN -2.56%) has a proprietary data streaming platform as well.

But, the estimates are that half of the new data streaming applications that are going to be built going forward are going to be built on Apache Kafka. It is a massive segment of this market that's going to be built on this open-source platform. That by itself puts these folks in a really strong position to take a substantial share of this market. Danny.

Danny Vena: Let me ask you a question here because, I have to be honest, the first time I read the description of what this company does, I came away shaking my head, going, "wait, what?"

Hall: Yeah.

Vena: You're right. This is definitely something that's not easy to wrap your head around. Let me see if I got this right. This is a company that enables streaming of data from a variety of sources so that it can be analyzed at the same time or in real-time. Is that accurate?

Hall: That's exactly right. Maybe this will help a little bit. This is from their presentation. This shows you what's happening. You have that real-time data. It's coming in. Here's the key thing.

Companies can build rules, they can build actions to happen, depending on where the data is coming from. For some things, the answer of what needs to be done with it is it needs to be sent to a database. It needs to be sent to a warehouse.

Every piece of data doesn't need to be acted on immediately, but it allows the company to find that small percentage of data that time is very sensitive and important and then it can leverage it more quickly and act on it immediately versus a day later or a week later because you think about the way analytics typically happens is it's the static queries that happen after the fact.

I have another cool slide that I like right here. This shows the giant digital mass. You have these different departments, and then you've got the public cloud over here, and you've got your databases, you've got your apps. You've got your software-as-a-service here.

All this stuff that goes to the data warehouse. You might have one data warehouse for the whole company. You might have multiple data warehouses on top of internal databases, and basically, it acts as a central nervous system. This is Confluent right here.

It's acting as a central nervous system, and it's making it easier for the company and more effective at dealing with that data, not just immediately, but down the road as well. It positions every company to leverage its data in a more effective way.

Vena: It certainly seems interesting, and I'm going to have to look at it again and see if I can come away with a better understanding because right now I'm still shaking my head a little.

Hall: It's not easy. It's not an easy one to wrap your head around. I think the biggest thing, and this is something management talks about, is that what they're trying to accomplish is a paradigm shift in the way companies deal with data, moving from data at rest to data in motion. It is a real paradigm shift.

A couple of data points to help maybe wrap your head around it, so there's something like 60,000 IT professionals that participate in Kafka, that are part of the meet-ups in the community that use it, something like 70% of Fortune 500 companies have an iteration of Kafka that they're using for something already, it's things that they've built internally that they are using.

80% of the Fortune 100 uses it to some extent, and again, that big point is that 50% of new applications are going to be built on Kafka. Confluent is so well-positioned as the expert for the companies that they want software-as-a-service, whether they have data that's proximate, or they're in the cloud, Confluent is the company.

They are the experts to be able to host, and manage, and run this for companies that don't want to take this giant bite and do it themselves.

Vena: I think one of the attractions of a company like this is if you're talking about the old Marc Andreessen quote, "software is eating the world." If software is eating the world, you have all the software, you have all this data, you have all this information, and it doesn't do you a bit of good unless you can make sense of it.